This Mutual Fund Giant Is Rethinking The U.S. Stock Market

If mutual fund firm Neuberger Berman is right, buy the triple levered Direxion S&P Large Cap Bear fund (SPXS) and go long U.S. small caps, and emerging market equity and debt.

While Neuberger didn't recommend the ETF, of course, the reason for being bearish on large caps is fairly straight forward, and one that many investors have been pondering for about a year now: quantitative easing is being withdrawn in the U.S. and Europe. Free money is getting a price tag now and so the risk profile is changing. Things are getting expensive. Capital isn't as cheap, though still at flea market levels.

Today, the QE economies in the U.S., Europe, and Japan are a more fragile regime than Fed Chairwoman Janet Yellen is letting on. She said she doubts there will ever be a 2008-09 type of crisis in "our lifetimes". But many savvy bond investors think that's wishful thinking. Moreover, in a downtown, where do central banks go to stimulate the economy when interest rates are still under 3% in the U.S. and barely over zero in Europe? In the U.S., the immediate solution would be to weaken the dollar.

So while the core economies figure out a return to normalcy, global investment firms are looking for an opportunity where valuations remain attractive and risk levels are relatively low.

As a result of these monetary policy shifts out there, Neuberger Berman's asset allocation team recently upgraded their outlook for equity markets outside the U.S. and revised their outlook for U.S. large caps downward and have gone underweight U.S. bonds.

On the other hand, they have increased their positions in emerging markets debt to overweight.

Erik L. Knutzen, CIO of Neuberger Berman said their 12-month outlook for both emerging market debt and equities was bullish. Economic growth remains respectable and valuations are still recovering from their 2011–15 bear market. That bear market basically occurred due to the so-called currency wars that push rates lower in the West and brought in hot money to markets like Brazil, most of it going to local currency debt. Currencies got strong, but economies were not strong enough to maintain that kind of exchange rate. Commodity prices were weak, trade was in decline, and when the dollar began strengthening following the 2013 "Taper Tantrum", emerging markets got clobbered again. Money stayed in the U.S. It became the world's biggest, if not only, emerging market.

Knutzen thinks the tide has turned.

"Things could be upset by a wrong step by China as it manages its growth slowdown and credit expansion, or a lurch lower for global growth," he says. "As long as the familiar not-too-hot, not-too-cold scenario plays out, emerging markets can outperform."

Emerging markets have beat both the S&P 500 and the FTSE Europe index this year, up 24% year-to-date.